Various economies have eased lockdown measures. Italian shops and restaurants reopened on Monday, and hopes rose in Greece that the tourism industry could revive for the crucial summer season. (UBS)

Progress on a COVID-19 vaccine. The day's most notable development was an announcement from US biotech firm Moderna that its experimental COVID-19 vaccine had shown early signs of efficacy. Interim data showed that the vaccine was able to produce antibodies to "neutralize" the new coronavirus, indicating protection from future infection. The evidence also found that the vaccine, mRNA-1273, was generally safe. Phase 3 clinical trials are due to start in July, and Moderna has said that if trials continue to produce positive results, "up to 1 billion doses" could be produced per year from 2021; a more limited number of doses could be available by the end of this year. Assuming the need for two doses per person, this could eventually be sufficient to cover all of the US and half of Europe, going a long way toward permitting a full return to normal economic functioning. The development increases the chances of a faster and more sustainable return to economic normality, particularly when combined with the recent progress on the antiviral drug remdesivir.

Evidence that a major second wave of the virus is not inevitable. Various economies have eased lockdown measures. Italian shops and restaurants reopened on Monday, and hopes rose in Greece that the tourism industry could revive for the crucial summer season. Reassuringly, infection rates have remained low in some countries that opened up their economies several weeks ago. The reproduction rate of the virus in Germany, which began to ease its lockdown in mid-April, remains below 1, and new cases remain below 1,000 per day. While we do see some signs of the reproduction number picking up again in Germany and Austria, where restrictions were lifted a few weeks ago, technologies such as mobile apps are being rolled out globally to help with contact tracing, and the public has been made highly aware of the risks of COVID-19. This reduces the risk that major economies will have to enter another complete shutdown in the future.

Economic data has provided some glimmers of hope. While much recent data for major nations has been poor, data from the German Bundesbank has raised hopes that the lockdown-driven recession may not have been as deep as feared. A real-time indicator, based on inputs including toll road traffic, electricity usage, air pollution, flights, Google searches, employment, and cash circulation, suggested that economic activity dropped by 4.6% in April, a smaller decline than consensus estimates.

More stimulus is on the way. Germany and France presented a joint proposed plan for a EUR 500 billion European recovery fund, to offer grants to areas hardest hit by the crisis. Investors were also encouraged by comments from Federal Reserve Chair Jerome Powell over the weekend, in which he affirmed that more monetary stimulus would be provided if required. Powell said he was "highly confident" that the US economy would bounce back once a vaccine has been developed. He added that a Great Depression-scale downturn was unlikely, and that the US financial system was "very strong." House Democrats also passed a USD 3tr spending bill; this is unlikely to pass the Senate, though we expect at least one more large US package to provide additional support from June.

What are we watching?

Monday’s developments illustrate that, even after around a month of range-bound trading, equities continue to have upside potential, provided investors can see clearer evidence of a path to sustained economic normality. To gauge progress on this, we are monitoring various indicators including hospitalization rates as economies start to reopen; news on the efficacy of drug treatments; progress on vaccine trials; and data on the prevalence of antibodies within populations, which could offer a guide to the potential severity of further waves of infection. We are also monitoring high-frequency indicators, some of which are already showing signs of increasing economic activity.

The path to our upside scenario is likely to be bumpy, with periodic setbacks. Even amid Monday’s generally positive news, cities in the Chinese provinces of Jilin and Liaoning, home to more than 70 million people, announced renewed lockdown measures to try and stem a new outbreak of the coronavirus.

Read more in the CIO Alert, 18 May 2020.

Author: Mark Haefele, Chief Investment Officer Global Wealth Management, UBS AG